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Bloomberg

This ‘Insanity’ May Be the Muni-Bond Market's Next Big Thing

It’s a "considerable risk," a "bad idea," or, as one expert put it, "insanity." And it may be the next big pitch Wall Street bond underwriters make to states and cities desperate to cover ballooning health-care costs.

Dearborn, Michigan, the 94,000-resident city that’s home to Ford Motor Co., tested the waters this week by selling $35 million of bonds to chip away at the $161 million it needs to cover the medical bills of workers who will retire in the years ahead. The city is betting that by investing the proceeds it will earn more than it will pay in interest, with the profits helping to cover health-care expenses.

Dearborn paid yields of 4.6 percent or less on the bonds it issued this week, well below the 7 percent or more that pension funds typically expect to earn each year on their investments. The injection of cash will bolster a health-care plan that was already about 29 percent funded as of fiscal 2016, bond documents say. That’s higher than the statewide average for localities that offer such benefits, James O’Connor, director of finance and treasurer for the city, said in an email.

"Unlike most municipalities in the state, the city of Dearborn has been prefunding its OPEB Trust Fund for some time," he said. The bond sale is part of an effort to reduce the liability that includes closing the plan to new hires, he said.

Municipal Market Analytics said in a report this month that it’s possible that more cities could follow Dearborn, in part because Wall Street underwriters will be looking for ways to drum up business given the lackluster pace of bond sales.

But the company said that -- like pension bonds -- they’re "a bad idea, maybe worse."

https://www.bloomberg.com/news/articles/2018-12-13/this-insanity-may-be-the-muni-bond-market-s-next-big-thing

Tim Holler
Governing

The Week in Public Finance: Kansas City Suburb Headed Toward Default

Platte County, Mo., is being punished for its resistance to bailing out a retail center that opened during the recession and has struggled to make bond payments.

County officials argue that taxpayers shouldn't have to pick up the tab. But the downgrades, says Municipal Market Analytics’ Matt Fabian, are already costing taxpayers. That’s because it will now be more expensive for the county to borrow money the next time it issues general obligation bonds in the municipal market. And Platte County is also extremely unlikely to find future buyers for any revenue debt that depends on an annual appropriation from the government.

“It hardly seems worth it when just restructuring the debt could have been an easy fix,” says Fabian. “From an economic development perspective, you’re now a non-investment grade county walking away from a bond. It’s hard to talk companies into moving there if that’s your debt profile.”

http://www.governing.com/week-in-finance/gov-platte-county-missouri-default.html

Tim Holler
Bloomberg

Muni-Bond Defaults Show Risk Clustered in Midwest, Southeast

To find the distress in the municipal-bond market, look to the Southeast and Midwest.

That’s the conclusion from Municipal Market Analytics, a research firm that examined state and local government bond defaults by using Bloomberg data and disclosure filings from issuers.

Such lapses are extremely rare, accounting for a minuscule share of the nearly $4 trillion market. But counties in the Midwest and Southeast are home to about 37 percent and 22 percent, respectively, of outstanding bonds that are in default for failing to make adequate payments or for violating elements of the debt contracts. Excluding bankrupt Puerto Rico, about $19 billion of the $31.8 billion in defaulted and impaired bonds are in those two regions.

That share is notable considering the areas together have issued only about one-third of all outstanding bonds.

Years of economic decline contribute to the distress in the Midwest, said Matt Fabian, a partner at MMA. The Southeast, meanwhile, has been home to speculative projects that have less of a cushion when they go downhill, he said.

https://www.bloomberg.com/news/articles/2018-11-13/muni-bond-defaults-show-risk-clustered-in-midwest-southeast

Tim Holler
CBS News

Wall Street billionaire says he's eyeing move to Puerto Rico to avoid taxes

"It's the only place a U.S. citizen can go and literally avoid, legally, all their taxes," Paulson said at the Beryl Elite investment conference in Manhattan on Monday, according to Bloomberg News.

In 2012, hoping to rebrand itself as a "global investment destination" like its counterpart in the Cayman Islands, the island passed Act 22, legally making it the only place in the country where passive income from financial instruments like capital gains, interest and dividends go federally untaxed. Under the act, would-be Puerto Rico residents, possibly like Paulson, are only subject to taxes levied by the island, like sales tax and license fees, said Matt Fabian, a partner at Massachusetts-based Municipal Market Analytics. Even property tax has a 90 percent exception under the law, Fabian said in a telephone interview Tuesday with CBS News.

The act, officially dubbed the Act to Promote the Relocation of Investors to Puerto Rico, is not available to current island residents.

"You're sort of above it all," Fabian said. "It's a very lucrative tax package so as to attract 'richies' like Paulson."

https://www.cbsnews.com/news/john-paulson-says-he-is-eyeing-move-to-puerto-rico-to-avoid-taxes/

Tim Holler
PharmacyChoice.com

The Week in Public Finance: What the Aging Population Means for State Finances [Governing]

A Credit Ratings Echo Chamber?

In the years following the Great Recession, the municipal market saw a rise in what's called a split rating where two credit agencies issue a different rating for the same municipal credit. Now, reports Municipal Market Advisors, that trend is on the decline: Spilt ratings account for about 41 percent of outstanding bond debt, down from 46 percent in 2015.

But it's not necessarily because rating agencies are agreeing more. Rather, it's more likely due to the issuer trend of obtaining fewer ratings on new issues. Previous research from Municipal Market Advisors has found that through the first five months of this year, 25 percent of bond sales have involved just one credit rating. That's far higher than the 13 percent rate a decade ago.

https://www.pharmacychoice.com/News/article.cfm?Article_ID=2127419

Tim Holler
VoiceOfSanDiego.org

Sweetwater’s Credit Rating Downgraded Days Before Voters Will Decide on New Bond Measure

“Conceivably they paid less [in interest] but it would probably be a very small amount,” said Matt Fabian, who researches municipal bond markets for Municipal Market Analytics. Bond investors don’t pay a great deal of attention to the underlying rating of California school districts when it comes to taxpayer-backed bonds, he said. That’s because, legally, tax money for construction bonds goes straight from homeowners to the county and into investors’ pockets. Because of California’s laws, investors and credit rating agencies see their bond investments as virtually untouchable regardless of a district’s credit rating, he said.

https://www.voiceofsandiego.org/topics/education/sweetwaters-credit-rating-downgraded-days-before-voters-will-decide-on-new-bond-measure/

Tim Holler
Bloomberg

Houston's $100 Million Ballot-Box Fight Over Firefighter Raises

Prop B threatens to cast Houston into the company of “basket case” cities, said Matt Fabian, a partner with Municipal Market Analytics Inc. Unless the administration has a “reasonable and funded plan to pay for this,” bond investors have reason to worry about how well the city is being managed.

“Houston is a basket case lite,” Fabian said. The city “is on the radar of most investors, in the context of legacy liabilities. The fact that they sold pension bonds is a red flag.”

https://www.bloomberg.com/news/articles/2018-10-31/houston-s-100-million-ballot-box-fight-over-firefighter-raises

Tim Holler
AmericanBanker.com

Chicago supersizes deal to wrap up securitization program early

“Rather than use its new rating arbitrage vehicle — the Sales Tax Securitization Corp. — to reduce scheduled GO debt service across its existing maturity schedule, Chicago plans to use the proceeds of an upsized $1.3B refunding this week to generate lopsided budget savings in the first 10 years while extending principal maturities by 13 years,” Municipal Market Analytics managing director Lisa Washburn wrote in the firm’s weekly outlook published Monday.

“Investors, rating agencies, and the state should be alarmed that Chicago has so quickly converted STSC from a pure refunding tool into a budget financing mechanism. This is not quite COFINA, but it’s getting closer,” she added, referring to a similar structure used by Puerto Rico that became tangled up in the commonwealth's Title III bankruptcy.

“The optimal use of the STSC is to use its lower cost of funds to generate the maximum savings for the city within the current debt structure,” she said.

https://asreport.americanbanker.com/news/chicago-upsizes-deal-to-wrap-up-securitization-bonds-early

Tim Holler
YAHOO.com

Why the Muni-Bond Market Cares About the Midterms

Matt Fabian, partner at Municipal Market Analytics, wagers there’s a more than 50 percent chance of an infrastructure bill passing the House if Democrats take control. Even so, it could easily die in a Republican Senate, given that a politically divided Congress is historically prone to gridlock.

“If you couldn’t get something done with control of both houses of Congress and the executive, it’s going to be difficult to get it done with a divided Congress,” said Ian Rogow, a municipal strategist at Bank of America Merrill Lynch.

https://www.yahoo.com/news/why-muni-bond-market-cares-151500596.html

Tim Holler
The Bond Buyer

Chicago pension bond remains in play after mayor's announcement

Municipal Market Analytics sees “some upside” for city creditors and taxpayers if Emanuel shelves a possible deal and while the administration stresses its commitment to solely issuing POBs to bring up funded ratios, MMA worries that the next mayor may have less “scruples" about taking contribution holidays or other budget financing gimmicks up front.

https://www.bondbuyer.com/news/chicago-pob-plan-still-in-play-after-mayors-announcement

Tim Holler
The Chicago Tribune

11 questions for Emanuel about a massive debt play

Governments borrow to finance long-term assets, like highways and sewers, that benefit citizens for decades. Isn’t this scheme instead like taking out a mortgage to cover a debt at the supermarket for groceries consumed years ago?

Credit specialists at Municipal Market Analytics say these bonds “seem particularly ill-suited for Chicago” and its recovery plan, which assumes “gradual but steady economic growth with no material downside surprises over a long period of time.” Why increase Chicagoans’ vulnerability to “downside surprises”?

http://www.chicagotribune.com/news/opinion/editorials/ct-edit-emanuel-debt-pension-10-billion-20180826-story.html

Tim Holler
Good-StockInvest.com

Illinois law allows state investments to pay down backlog

The bill passed with bipartisan support in 49‑1 Senate vote and 115-0 House vote, but it has critics in municipal market.

“The transaction could optically lower the state’s headline-producing bill backlog” and “could reduce interest costs” but longer term “it also could be the start of a shell game that saddles the treasurer with less liquid, politically charged investments, defers real progress on addressing the bill-backlog, and could amplify Illinois’ fiscal woes if its finances continue to deteriorate,” Lisa Washburn, a managing director at Municipal Market Analytics, wrote in a report on the legislation earlier this year.

https://good-stockinvest.com/index.php/2018/08/29/illinois-law-allows-state-investments-to-pay-down-backlog/

Tim Holler
Morningstar

Chicago mulls $10 billion debt sale to fill pension funding hole -- here's why it's a bad idea

Pension obligation bonds, or POBs, have been connected with high-profile municipal defaults in California's San Bernadino and Stockton, as well as Detroit. At the state level, issuers of POBs including New Jersey and Connecticut, and the territory of Puerto Rico, have seen a decline in their pension funding ratios and suffered downgrades to their credit rating as a result, noted analysts at Municipal Market Analytics. Illinois, in fact, issued pension bonds in 2003 that only temporarily brought up funded ratios.

http://news.morningstar.com/all/market-watch/TDJNMW2018082378/update-chicago-mulls-10-billion-debt-sale-to-fill-pension-funding-hole-heres-why-its-a-bad-idea.aspx

Tim Holler
Tennessean.

In unusual move, Fifth + Broadway developer seeks $25M in tax-exempt bonds from MDHA

"This development is so important to Nashville for a number of reasons, including the fact that it's the future home of the National Museum of African American Music, so we wanted to at least consider the developer’s options," said MDHA's Jamie Berry. 

But a municipal finance expert said the move may portend problems for the developer.

“It could be that the tax-exempt market is cheaper,” said Matt Fabian, a partner at Massachusetts-based Municipal Market Analytics. "But that may not be the whole story.

“The developer may be struggling," Fabian said. "You have to be concerned that the developer has tried and failed to get financing on their own. Either they can’t get it, or it’s coming in at a very high rate."

https://ux.tennessean.com/story/money/2018/08/20/fifth-broadway-old-nashville-convention-center/993281002/

Tim Holler
The Bond Buyer

Why MMA says Chicago should avoid selling pension bonds

“In the short-run, the shift of the pension liability to bonded debt may enable the city to realize some budgetary relief,” MMA writes in its weekly outlook. “But in the long-run we suspect that this would—as with most pension obligation-using governments before them—cost taxpayers more money and could weaken the city’s fiscal position despite a ‘savings’ claimed at issuance.”

https://www.bondbuyer.com/news/why-mma-says-chicago-should-avoid-selling-pension-bonds?feed=0000015b-11b9-dcff-abff-f9fd85f60000

Tim Holler
The Chicago Tribune

Borrowing billions to lower Chicago's pension debt? Emanuel's finance team is considering it.

Another bond analyst, Matt Fabian, frowned on the whole idea.

“There is no best practice for pension obligation bonds,” Fabian, a partner at Municipal Market Analytics, said in an email response to Tribune questions. “When you invest borrowed money, you lose twice if the stocks you buy decline in price.

“The ‘hysteria’ about pensions is very effective in marshaling fiscal discipline,” Fabian added. “Would be a shame to lose that.”

http://www.chicagotribune.com/news/local/politics/ct-met-rahm-emanuel-pension-debt-bonds-20180803-story.html

Tim Holler
BNN Bloomberg

Puerto Rico Power Utility Bonds Soar on Restructuring Deal

(Bloomberg) -- The Puerto Rico electric company’s bonds surged after it struck a preliminary agreement with bondholders to restructure its crippling debts, marking a major advance in the government-owned utility’s efforts to emerge from bankruptcy.

The pact -- reached by the island’s government, the territory’s federal oversight board and a key group of investors -- would slash the debt service bills of the Puerto Rico Electric Power Authority more deeply than an agreement the board rejected a year ago. The board said in a statement Monday that it’s working to finalize the deal for the power company known as Prepa.

The company’s bonds were the most actively traded municipal securities Tuesday, when investors pushed up the price of some of them by nearly 40 percent. Debt due in 2040 jumped to an average of 60.2 cents on the dollar from 43.4 cents Monday, according to data compiled by Bloomberg.

Reducing the utility’s $9 billion of debt may push the utility closer to privatization because investors would be cautious about lending needed money to the company if it continues to be run entirely by a government that steered it into collapse, said Matt Fabian, partner at Municipal Market Analytics. Puerto Rico is seeking to sell some of the utility’s assets or enter into long-term concession agreements with private operators.

“The board likes this deal because it’s going to force the issue of privatizing Prepa,” Fabian said. “Investors will always be more careful in lending a Prepa successor money.”

https://www.bnnbloomberg.ca/puerto-rico-power-utility-bonds-soar-on-restructuring-deal-1.1116706

Tim Holler
The Chicago Tribune

Feds started probing source of $6M used to fund Harvey library expansion mere weeks after 2015 groundbreaking

The deal set the purchase price at $6,733,740 with a 7.1 percent interest rate, also known as the coupon rate. The library district received more than the $6 million face value of its bond because it issued the security at a premium, meaning it got more money up front, but would have to pay a higher interest rate to investors over time. The 7.1 percent coupon was the highest coupon on any comparable municipal security issued in Illinois that year, according to Bloomberg L.P.

“Having such a high coupon would indicate it’s an outlier in a bad way,” said Matt Fabian, a partner at the municipal bond research firm Municipal Market Analytics. “Sometimes (issuers) will use a high coupon to entice buyers, but that usually stops around 5 percent.”

Lisa Washburn, managing director for Municipal Market Analytics, said that while the bond’s peculiarities raise concerns for her as a credit analyst, there could also be legitimate explanations for its unusual structuring — like Harvey’s reputation.

“The name ‘Harvey’ could mean that buyers demand more yield on that,” she said. ”There could be reasons for all of this.”

In addition to its structuring, the bond’s initial trading activity also may have attracted federal investigators’ attention, Fabian said.

http://www.chicagotribune.com/suburbs/daily-southtown/news/ct-sta-harvey-library-sec-investigation-st-0722-story.html

Tim Holler
Crain's Detroit Business

One-fourth of Monroe’s revenue in tax fight with DTE Energy

An overdependence on one industry has proven a pitfall for other U.S. municipalities. Detroit collapsed into bankruptcy after decades of seeing its population dwindle as auto-industry jobs disappeared. Atlantic City had to be rescued by New Jersey as some casinos shuttered and others appealed their tax bills. Wayne, New Jersey, could be in trouble now that its third-largest taxpayer, Toys 'R' Us, is out of business.

"A concentrated tax base is a principal credit risk in a small government," said Matt Fabian, managing director and senior analyst at Municipal Market Analytics Inc. "Their reliance on a single industry or company creates potential volatility and that could be hard for a small government to manage."

http://www.crainsdetroit.com/article/20180703/news01/665286/one-fourth-of-monroes-revenue-in-tax-fight-with-dte-energy

Tim Holler